What is a jumbo loan and when do you need one?

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A jumbo loan is a mortgage for an amount that exceeds the limits set by Fannie Mae and Freddie Mac, the government-sponsored giants that buy most U.S. home loans and package them for investors.

If you’re buying a mansion — or just a regular home in a high-priced area like Silicon Valley — you might need a jumbo loan.

What is a jumbo loan?

As the name implies, a jumbo loan covers a larger-than-normal loan amount. The maximum size of a jumbo loan varies by lender.

Qualifying guidelines can vary, too. Because the market for jumbo loans is smaller than the market for conforming loans, you might need to shop around a bit more to find a mortgage.

Aside from those caveats, jumbo loans aren’t much different from conforming loans. Payment schedules and other details are the same. Borrowers can get fixed- or adjustable-rate jumbo mortgages with various term options. As of early November, rates for jumbo loans were substantially higher than rates for conforming loans, about 50 basis points on average, or one-half of 1 percent.

Jumbo mortgages can be used for primary homes as well as for investment properties and vacation homes.

Jumbo loan limits

For 2020, the limit for loans issued by Fannie Mae and Freddie Mac in much of the country is $510,400. However, the loan limits are higher in expensive areas. For much of California and for the New York and Washington, D.C., metro areas, the 2020 loan limit is $765,600. Alaska and Hawaii also have loan limits of $765,600 for 2020.

The bottom line: If you want to borrow more than the loan limit for your area, you’ll need a jumbo loan.

Jumbo loan rates

The rates on jumbo mortgages fluctuate and can be higher or lower than the conforming mortgage rate. For instance, as of early November, the average 30-year jumbo rate was 3.49 percent, compared with a conventional 30-year fixed rate of 3.03 percent, according to Bankrate’s national survey of lenders.

What are the benefits of a jumbo loan?

The main benefit for borrowers is that a jumbo mortgage lets you borrow more than the limits imposed by Fannie and Freddie. For instance, if you’d like to borrow $1 million against a $1.5 million home, a jumbo loan makes it possible.

Some borrowers prefer to finance more of the home’s cost rather than tying up cash, making the jumbo mortgage a helpful financial tool and part of an overall investment strategy. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.

How to qualify for a jumbo loan

Jumbo lenders typically impose stricter underwriting guidelines. Because the loans aren’t backed by Fannie or Freddie, jumbo mortgages pose more risk to the lender. On the flip side, lenders have more to gain — the dollar value of the loan is higher, and the lender gains an opportunity to sell additional services to these more affluent customers.

The three common hurdles borrowers must clear to get jumbo-loan approval are larger income requirements, higher credit scores and heftier reserves, says Robert Cohan, president of Carlyle Financial based in San Francisco.

“To consider a jumbo loan the FICO scores have to be higher. The average is around 740, although I have seen some as low as 660,” Cohan says.

Borrowers whose scores fall beneath the normal requirements usually have to offset that shortcoming with a low debt-to-income ratio.

“If you’re high-leveraged and you have a low credit score, it’s going to be hard to get a jumbo loan,” Cohan says.

Borrowers should be prepared to show enough reserves, or liquid assets, to cover between six and 12 months’ worth of mortgage payments. The down payment on a jumbo loan is typically 10 percent to 20 percent.

“Anything lower than a 10 percent down payment and you’re probably going to pay for it in higher rates,” Cohan says.

While there were reports of lenders pulling back from jumbo mortgages early in the coronavirus pandemic, the housing market boomed this summer and fall. For now, mortgage experts say the market for jumbo loans is mostly back to normal.

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